22. Certainty equivalents (S9.4) A project has the following forecasted cash flows: Cash Flows ($ thousands) C0
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22. Certainty equivalents (S9.4) A project has the following forecasted cash flows:
Cash Flows ($ thousands)
C0 C1 C2 C3
–100 +40 +60 +50 The estimated beta is 1.5. The market return is 16%, and the risk-free rate is 7%.
a. Estimate the cost of capital for the project and the project’s PV.
b. What are the certainty-equivalent cash flows in each year?
c. What is the ratio of the certainty-equivalent cash flow to the expected cash flow in each year?
d. Explain why this ratio declines.
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Related Book For 
Principles Of Corporate Finance
ISBN: 9781264080946
14th Edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen, Alex Edmans
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